Working for a small business offers employees certain intangibles, such as the family-like atmosphere that often comes with a small shop. It can be a different story, though, when it’s time to retire. Because few small businesses offer pensions, many employees face less-than-golden years when they stop working.
“Retirement insecurity,” the polite term for the prospect of poverty in old age, is an increasing likelihood for more than 80 percent of US workers in the bottom quarter of the wage scale who don’t take part in retirement plans. At upper-income levels, retirees “may have four or five substantial income sources,” according to a 2011 report from the University of California, Berkeley’s Center for Labor Research and Education. Retirees who earned lower wages tend to depend only on Social Security, which averages $14,000 annually. Even if lower-income workers manage to save on their own, they may lack expertise to make investment decisions.
Low-wage workers are the demographic group that has the most to gain from a new model of state-sponsored pensions for private sector employees. The National Conference on Public Employee Retirement Systems (NCPERS) is advocating adoption of what it calls Secure Choice Pensions. Hank Kim, executive director and counsel for NCPERS, says the idea is to create statewide plans that emphasize simplicity, portability, and sustainability. “The only thing employers would have to do is give their employees the option of participating through payroll deductions,” he says, “and give themselves the option of contributing.”
Kim doesn’t want to place new burdens on small businesses “that are focusing on a daily basis to make sure their business continues. To ask them to take their eyes off that and become a human resources center is not going to happen.” Instead, NCPERS envisions individual states taking on the administrative and fiduciary burdens of the new plans, just as they do with public pensions.
The predictability of defined benefits is another feature of Secure Choice Pensions. That’s a distinction from defined contribution plans, which fluctuate in value with market changes. During the recent recession, Kim estimates that baby boomers saw their assets “essentially cut in half. Individual investors, particularly those who rely on 401(k) plans almost exclusively for retirement savings, are facing significant issues if they plan to retire within the next 10 to 15 years.”
By creating large risk pools, the new plans would—in theory—be able to cover payouts and keep management costs low. “We would look to the insurance market to backstop any shortfall,” Kim says, insisting that the new plans would create “no taxpayer liability.”
Nonetheless, the possibility of shortfall raises alarms for skeptics and small-government advocates. In California, the first state to pass legislation to establish a state-sponsored plan, local chambers of commerce have been vocal critics of state involvement in any new pension products. The Orange County Business Council, pointing to California’s unfunded public pension liability, questioned why the state should consider entering the private pension business.
Kim expects more states to take up the idea in 2013. Meanwhile, his organization is advocating changes in the federal tax code, “lifting fiduciary and administrative burdens off the employers and placing it on the plan.”
Karen Friedman, executive vice president and policy director for the Pension Rights Center, predicts the plans will be “winwins for both employees and businesses. State-based models for pension expansion could become the incubator for a comprehensive national solution.”
Because the proposed plans would operate separately from public retirement systems, Friedman adds, “they will not add to state budget deficits or add to the liabilities of the state systems.”
Although plans would have a state oversight board, the investment and management functions would likely be contracted out to the private sector. That means the plans “could provide new business opportunities to the private sector,” Friedman adds.
Kim expects criticism to fade as states develop their own versions of Secure Choice plans. “We’re going after a market that hasn’t been served by the current set of retirement options out there,” he says. “I don’t think we’re stepping on anybody’s toes.”